Subprime loans from 2006 and 2007 that exceed the value of the homes jumped 5 percentage points to 19.8 percent in the fourth quarter, and may reach 26 percent by midyear if prices drop at the same pace, Barclays analysts wrote in a report yesterday. Alt-A loans, a grade better than subprime, would grow to 23 percent from 16.3 percent.
Many of the loans are in areas where prices are falling faster than the U.S. average, so the size of the shift is underappreciated, New York-based analysts Ajay Rajadhyaksha and Derek Chen wrote. The odds that a borrower will default, saddling lenders and bond investors with losses, rises when a homeowner owes more on a property than it can sell for, they wrote.
``Mortgage loans are moving underwater at a very sharp pace, far more than suggested by aggregate home price data,'' they wrote. Home mortgages held by households totaled $10.5 trillion on Dec. 31, according to Federal Reserve data.
The analysts used quarterly home-price data from the Office of Federal Housing Enterprise Oversight, which showed a 0.3 percent dip in prices nationwide in the fourth quarter from a year earlier, and tumbles of more than 14 percent in Modesto, California, and Port St. Lucie, Florida. S&P/Case-Shiller indexes tracking areas around 20 cities have shown more severe declines, including a 9 percent nationwide drop in the same period.
`Better to Sell'
Borrowers on about 26 percent of subprime loans from 2006 and 2007 will have equity of less than 10 percent by midyear, down from 29.4 percent at yearend, according to Barclays, as more borrowers slip underwater. The percentage on Alt-A mortgages should hold steady at about 23.5 percent. The report said 10.8 percent of Alt-A loans were underwater on Sept. 30.
``If they have home equity left, borrowers are hesitant to default, even if in trouble,'' the analysts wrote. ``If the house is worth more than the loan, why default and leave money for the bank? Better to sell the house instead.''
Borrowers with poor or limited credit records or high debt used subprime mortgages to buy properties or tap home equity by refinancing. Lenders made Alt-A home loans to borrowers who want atypical terms such as proof-of-income waivers, delayed principal repayment or investment-property collateral, without having to offer sufficient compensating attributes.
Among two-year-old Alt-A mortgages that are underwater, 33 percent are at least 60 days late, the analysts wrote. That compares with 7 percent delinquency on similar loans in which homeowners have equity of at least 20 percent. For corresponding subprime loans, the delinquency rate is 58 percent for underwater debt and 29 percent where equity exceeds 20 percent.
Borrowers who have never been delinquent on a subprime mortgage are three times more likely to miss a payment if they have less than 20 percent equity in their homes, when compared with similar borrowers with more equity, according to a report last week from Credit Suisse Group. These homeowners then catch up only half as often as their counterparts, the report said.
Home prices in 20 U.S. metropolitan areas fell in February by the most on record, according to a report released today. The S&P/Case-Shiller home-price index dropped 12.7 percent from a year earlier, more than forecast and the most since the figures were first published in 2001. The gauge has fallen every month since January 2007.